The most interesting thing I read in the last week was a new study which found that many Americans are hoarding huge amounts of cash in their checking accounts – for reasons that are not entirely clear.
The theory goes that when times are good, people draw down the amounts they hold in their checking accounts; and when times are bad, they increase the amounts in these liquid accounts.
If we believe the economic reports over the last year, times are pretty good overall. The economy has grown by an average of 2.2% over the last three years. Jobs growth has averaged over 200,000 per month this year, and the unemployment rate at 4.1% is the lowest in 17 years. Consumer and business confidence are their highest in over a decade.
In 2007, before the Great Recession unfolded, Americans had the lowest average balances in their checking accounts. Yet even though we survived the financial crisis of 2008-early 2009 and the economy recovered, Americans have been adding money to their checking accounts quarter after quarter ever since. In fact, average checking balances were the highest in over 25 years at the end of last year.
When I read this latest study showing how much money most Americans have parked in checking accounts, I was surprised. As a result, I asked most of my co-workers and a number of my friends how much money they thought most Americans keep in their checking accounts. Almost everyone answered: $500-$1,000 after paying their bills. Checking accounts, after all, pay next to nothing in interest.
OK, here are the numbers. Moebs Services, an economic research firm in Illinois, analyzed over 12,000 random checking accounts and depository call reports and compared them to Federal Reserve monetary data. What they found is that the average consumer checking account balance has increased dramatically since late 2007 when it was less than $1,000 – and continues to grow to this day.
Bottom line: The average checking account customer has more than $3,700 stashed away. The median amount in checking accounts since 1991 is $2,263. So, what could be going on here? Michael Moebs, economist and Chief Executive of Moebs Services said:
“The consumer in banks, thrifts and credit unions by region, state, city and asset size keeps warehousing more checking dollars. The average Joe and Jane still are very leery of the economy.”
When the data above came out early last week, there was speculation that having so much cash in bank accounts must be a negative for the economy and bearish for stocks. Granted, if Americans were spending that cash and buying more shares, the economy would likely be stronger and stocks might be even higher. But they’re not spending it.
The point is, the economy has recovered and stocks have soared to new record high after new record high despite checking account balances soaring in recent years.
Joe and Jane’s mattress-stuffing approach to managing their finances has reflected a desire for safety after the Great Recession. Seeing the economy all but collapse, with some major financial institutions surviving only by the grace of taxpayer bailouts – makes an impression on people.
I get that. What I don’t get is why checking account balances have soared at the same time that outstanding credit card debt has exploded to a new record high of over $1 trillion at the end of last year.
The average US household owes $8,600 on credit cards, according to WalletHub. The Fed reported that the average interest rate on credit card accounts was 13.2% at the end of last year. Many cardholders pay much more than that.
Compare that to the average interest rate paid on checking accounts at brick-and-mortar banks which is next-to-nothing at 0.4% (APY) – and most have a minimum deposit requirement to get that interest.
At the end of the day, the question is: Why are Americans hoarding cash in low/no-interest checking accounts while at the same time racking up record amounts of high-interest credit card debt?
While it’s not unusual for households to keep some extra cash in their checking accounts to pay monthly bills, a national average of over $3,700 is way over the top. Something else is going on. If I figure it out, I’ll be sure to let you know.
In the meantime, I would love to hear from any of you who may have an idea about what is happening on this subject. As always, I enjoy your feedback whether you agree with me or not.
I would tend to guess that those of increased net worth have the higher checking balances… and those of lesser net worth may have higher credit card debt. I suspect there are some social-economic differences here that need to be categorized to get the complete picture.
Exactly. Foolish to assume they are one and the same. We keep an average about twice that 3700 figure as it simply builds up….when it hits more than I think it should, I move some to a ‘decent’ (relatively speaking) paying credit union savings. And our credit cards get paid at the end of each billing period, never paid a dime in interest over the decades we’ve had cards.
Gary,The reason people are leaving more in checking accounts is that the stupid fed has rates so low that there is no incentive to move to savings or Cds !!